Currency Devaluation Blues in Nigeria

The devaluation of naira has affected the Indian companies operating in Nigeria. Nigeria is the single largest export market for Bajaj Auto and accounts for one third of its exports. Exports constitute 42 % of revenue for Bajaj Auto. Exports to Nigeria have decreased from 40,000 units to 20,000 units in the recent years. For the other Indian companies like Bharti Airtel, Godrej Consumer Products(GCPL) which operate locally, imports have become more expensive. There is also a rise sharp rise in expenditure related to operations. Profit margins have reduced for the Indian companies. Bajaj Auto’s exports are expected to decline by 5 % in the year 2016-2017. African business constitutes 26% of the integrated revenue for Bharti Airtel. Nigeria is the single largest client of Bharti Airtel, accounting for top one third of profits. GCPL earns around 7% of its integrated revenue from Nigeria. The company views currency devaluation as an intrinsic component of business planning. The company hopes the economy and business will adapt to naira, since everything is market-driven. However, currency devaluation occurring too often has the effect of increasing the business risk for these companies who have invested in Emerging Markets. An unexpected beneficiary of Nigerian currency devaluation is the MTN Group Ltd. The Nigerian government had fined the company for having missed time deadline to disconnect unregistered cellular phone users. The devaluation resulted in a significant reduction of the 330 billion naira fine.

The reasons for devaluation of naira include the effect of market forces and the decline of economy. The Central Bank of Nigeria has allowed the exchange rate for naira to be driven by market conditions. The devaluation is pegged at 36 percent and the new trading system becomes effective from June 20, 2016. The CBN shall allow trading of naira through a group of 10 primary dealers. Only one exchange rate shall be maintained and depending on the situation and need, the CBN shall intervene to buy or sell foreign exchange in the market.

Before the currency devaluation, Nigeria suffered from severe shortage of foreign currency. Due to the plunge in global oil prices, foreign exchange reserves had come down drastically and the result was the existing cash reserves were insufficient to pay for imports. There was shortage of raw materials, machine parts in the industries. Businesses were forced to deal with the black market operators to pay for imports at exorbitant rates. Several airlines had cancelled flights to Nigeria. The country was rapidly moving towards recession.

Nigeria has to develop a strong economic model. It requires strong growth in non-oil sectors and the focus should be on human development. Nigeria is one of the largest exporter of crude oil. Nevertheless, it faces severe shortage of fuel for domestic consumption as the oil refineries are not functional, and are poorly maintained. It imports fuel. Due to   shortage of foreign exchange, imports are less. The public buy the fuel in the black market at premium price. With the devaluation, imports will become more costly, resulting in further shortage of fuel. The public and the industry continue to suffer. There is no escape until radical changes are implemented to put the economy back on the right track from this vicious cycle. Currency devaluation is one of the factors affecting Nigeria. Militant activities has resulted in economic destabilization of Nigeria. Infrastructure woes exist in transport and power sector. There are multiple, complex factors involved in the present crisis and each one has to be tackled separately for the economy to recover.

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